Federal Reserve Chairman Ben S. Bernanke said volatility in credit markets has affected the economys prospects and policy makers must decide whether the risks between growth and inflation have now shifted.
The outlook has also been importantly affected over the past month by renewed turbulence in financial markets, Bernanke said in a speech in Charlotte, North Carolina. The committee will have to judge whether the outlook for the economy or the balance of risks has shifted materially.
Bernanke spoke a day after remarks by Vice Chairman Donald Kohn stoked investors expectations for the central bank to lower interest rates for a third straight meeting Dec. 11. While the Fed chief discussed both the risks to growth and inflation, he indicated the central bank is watching for additional signs of a pullback in spending.
Neither Bernanke nor Kohn repeated the language in last months Federal Open Market Committee statement that risks between growth and inflation were roughly balanced. Economists interpreted the Oct. 31 statement as a signal policy makers preferred to leave rates unchanged for a time.
Uncertainty around the outlook is even greater than usual, requiring the Fed to be exceptionally alert and flexible, Bernanke said at an annual meeting of the Charlotte Chamber of Commerce.
Consumer Headwinds
The combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead, Bernanke said. Continued good performance by the labor market is important for maintaining the economic expansion.
Kohn said yesterday that officials must take account of the deterioration in credit markets when they next meet. Bernanke echoed that view.
The Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy, Bernanke said.
Federal funds futures show traders see a 100 percent chance of a reduction in the benchmark rate next month, with a 26 percent probability of a half-point move. After the 0.75 percentage point of cuts the past two meetings, that would make the most aggressive easing since the last recession in 2001.
Treasuries Rally
Treasuries have climbed this week, sending three-month bill yields below 3 percent for the first time since August, as concern over banks willingness to lend drove investors to the relative safety of U.S. government debt.
At the same time, stocks rallied on optimism the Fed will act to keep alive the economic expansion, now entering its seventh year. The Standard & Poors 500 Index rose 4.4 percent in the past three days, to 1,469.72 at the close in New York.
Economists also predicted lower rates amid concern mounting losses on assets linked to subprime mortgages will cause banks to cut borrowing. Citigroup Inc., Merrill Lynch & Co., Barclays Plc and other banks have already warned of about $50 billion of losses.
Economic reports today indicated growth may falter after accelerating in the third quarter. New-home prices dropped the most since 1970 and jobless claims rose to a nine-month high. Government figures yesterday showed durable goods orders fell for a third month, the longest slump in 3 1/2 years.
Household spending data have been on the soft side, Bernanke said. The committee will have considerable additional information on consumer purchases and sentiment to digest before its next meeting.
Mixed Data
Economic data have been mixed since last months FOMC meeting, the Fed chairman said. He noted that officials will have further reports, including November payroll figures, when they gather Dec. 11.
President George W. Bushs economic advisers today followed Fed officials move last week to lower their outlook for growth next year. Fed policy makers now expect U.S. gross domestic product to increase 1.8 percent to 2.5 percent in 2008, notably below the 2.5 percent to 2.75 percent they predicted in July.
Bernanke said inflation has remained moderate. Still, increases in the prices of food, imported goods and energy products may raise inflation and inflation expectations, he said.
The effectiveness of monetary policy depends critically on maintaining the publics confidence that inflation will be well- controlled, Bernanke said. We are accordingly monitoring inflation developments closely.
Higher Risk
In financial markets, risk spreads have increased since the Fed met Oct. 30-31, an index tracked by Citigroup Global Markets Inc shows. The index rose to a high of 0.99 on Nov. 22 from 0.77 on Nov. 1, with 1 being the highest level of risk aversion. It was at 0.94 today.
Fed officials have tried to meet the surge in demand for cash, first lowering the cost of direct loans to banks in an unscheduled meeting in August. The central bank cut both the discount rate and its key rate in September and October. The New York Fed also said this week it plans a series of long-term repurchase agreements through year-end to ease funding shortages.
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Thursday, November 29, 2007
Bernanke Says Fed to Judge Market Turbulence Impact
Asian Stocks Gain
Asian stocks rose, helping a regional index to its best weekly gain in two months, after copper prices climbed to a one-week high and Credit Suisse Group raised its recommendation on some Japanese steelmakers.
BHP Billiton Ltd., the world's largest mining company, climbed to a three-week high. JFE Holdings Inc., the world's third-largest steelmaker, jumped the most in two months.
The MSCI Asia Pacific Index added 0.6 percent to 161.64 as of 10:02 a.m. in Tokyo, set for its highest close since Nov. 15. A measure of mining companies and steelmakers jumped 1.5 percent, the biggest advance among 10 industry groups.
The benchmark has gained 4.4 percent this week, the most since the five days ended Sept. 28. Gains helped trim the MSCI index's November loss to 6.1 percent, its worst monthly performance since May 2006.
Japan's Nikkei 225 Stock Average gained 0.7 percent to 15,623.06. Benchmarks climbed in other markets open for trading, Except New Zealand. The Philippines is closed for a holiday today.
Most U.S. stocks dropped yesterday, halting a two-day rally, after Sears Holdings Corp. reported lower profit and Goldman Sachs Group Inc. said banks' losses on home-equity loans may double in 2008. More than three stocks fell for every two that rose on the New York Stock Exchange.
Federal Reserve Chairman Ben S. Bernanke said volatility in credit markets has affected the economy's prospects and policy makers must decide whether the risks between growth and inflation have shifted. He spoke a day after remarks by Vice Chairman Donald Kohn fueled speculation the central bank will lower interest rates for a third straight meeting on Dec. 11.
Japan Consumer Prices Rise 0.1%, First Gain This Year
Japan's consumer prices unexpectedly rose for the first time since last December as oil and raw materials costs surged.
Core consumer prices, which exclude fresh food, climbed 0.1 percent in October from a year earlier, the government's statistics bureau said today in Tokyo. The median estimate of 40 economists surveyed by Bloomberg News was for no change.
The gain probably won't prompt the Bank of Japan to raise interest rates because falling wages are curbing consumer spending and economic growth. Deputy Governor Toshiro Muto said this month that the U.S. housing recession and market turmoil make it difficult to decide when to raise the key rate from 0.5 percent, the lowest among major economies.
Mounting risks for the economy are already reducing the chance of a rate hike, said Azusa Kato, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. The improvement in core prices won't provide much support for the central bank's attempt to raise rates.
The jobless rate was unchanged in October after rising in each of the two previous months, the bureau said, matching the median estimate of economists. The rate has risen from a nine- year low of 3.6 percent in July. The number of jobs available for each applicant slumped to 1.02 in October from 1.05.
The yen traded at 109.71 per dollar at 8:44 a.m. in Tokyo from 109.84 before the reports were published.
Interest Rates
Expectations of a rate increase are already receding. Yields on the benchmark 10-year government bond fell to a two- year low last week.
Investment banks including Mizuho Securities Co., UBS AG and Goldman Sachs & Co. this month postponed predictions for the next rate increase from the first quarter of 2008 to at least the third quarter.
Financial markets will keep gyrating, probably more frequently than we've seen, said Yasunari Ueno, chief market economist at Mizuho Securities. It'll take time before fears about a credit crunch and economic recession ease and markets regain a more optimistic outlook.
Rising prices of crude oil, wheat and aluminum are squeezing profits and prompting more companies to pass on costs to customers.
Overcoming Deflation
Japan's central bank raised the benchmark overnight lending rate in July 2006 after holding it near zero for more than five years to overcome deflation. Policy makers doubled the rate to 0.5 percent in February and have kept it on hold since.
Excluding energy as well as food, consumer prices fell 0.3 percent in October. By that measure, prices have failed to rise for nine years.
Excluding oil, the momentum of consumer price increases is pretty weak, said Kato at BNP Paribas.
Tokyo's core prices, a harbinger of the nationwide index, rose 0.1 percent in November from a year earlier, the first increase in 10 months.
Crude oil prices touched a record $99.29 a barrel last week. Japan's regular gasoline prices averaged 150.2 yen a liter ($5.25 a gallon), the highest since the Tokyo-based Oil Information Center began collecting the data in 1987.
Morgan Stanley's Cruz to Leave After Trading Losses
Morgan Stanley Co-President Zoe Cruz, the highest-paid female executive on Wall Street, will end her 25-year career at the firm three weeks after it disclosed $3.7 billion of losses on mortgage-related securities.
Morgan Stanley, the second-biggest U.S. securities firm by market value, named Walid Chammah, 53, and James Gorman, 49, to replace Cruz and Robert Scully as co-presidents, the New York- based company said today in a statement. Scully, 57, will join a newly created office of the chairman.
Cruz, 52, who oversaw trading, was viewed by analysts as a leading candidate to succeed Chief Executive Officer John Mack. Her departure adds to the list of banking executives who have stepped down amid a wave of credit losses tied to subprime home loans. Warren Spector, the former co-president of Bear Stearns Cos., was forced out in August, followed by Merrill Lynch & Co. CEO Stan O'Neal and Citigroup Inc. chief Charles Prince.
In this environment, if things happen on your watch, then the door is where you are pointed, said Ken Crawford, a portfolio manager at Argent Capital Management in St. Louis, which has about $950 million of assets, including Morgan Stanley shares. At investment banks of late, it's hard to say that big heads have not rolled.
Morgan Stanley shares have tumbled 23 percent this year, the steepest annual decline since 2002. While the stock lags behind the 13 percent gain by Goldman Sachs Group Inc., the biggest U.S. securities firm, it has outperformed the 38 percent drop at Merrill Lynch and the 39 percent slump at Bear Stearns.
Dollar Heads for a Weekly Advance Against the Euro
The dollar headed for the biggest weekly gain in two months against the euro on concern the reluctance of banks to lend is worsening in Europe.
The U.S. currency was near the highest in a week versus the British pound as the cost of borrowing in euros for one month rose by a record amount as banks sought funds to cover their commitments through to the start of next year. A U.S. government report today is forecast to show personal spending increased 0.3 percent last month.
The U.S. dollar is looking relatively cheap and I would be looking to sell the euro and pound, said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia's fourth-biggest lender. Credit concerns are spreading like a disease from one continent to the next. There are signs of slowing in the European economy.
The U.S. currency, which has fallen 11 percent on a trade- weighted basis this year, was at $1.4771 per euro at 9:25 a.m. in Tokyo from $1.4744 late in New York yesterday. It touched $1.4712 on Nov. 27, the strongest since Nov. 20. The dollar was at $2.0638 per pound from $2.0612 yesterday. It was at 109.79 yen and the euro bought 162.14 yen.
The yield on the March Euribor interest-rate futures contract was unchanged yesterday at 4.4 percent. It has declined 33 basis points since reaching 4.73 percent on July 6. The yield on the 90-day sterling interest-rate futures contract for June fell 8 basis points to 5.33 percent. It was 6.4 percent on July 17. A basis point is 0.01 percentage point.
The London interbank offered rate that banks charge each other for euro loans that only come due after the end of 2007 climbed 64 basis points to 4.81 percent yesterday, the British Bankers' Association said. The rate charged for dollars rose 40 basis points to 5.23 percent.
The dollar will gain to $1.44 per euro and 112 against the yen by the end of June, according to the median forecast of 39 analysts and brokerages surveyed by Bloomberg.
Bernanke
The dollar pared its weekly advance after Federal Reserve Chairman Ben S. Bernanke said volatility in credit markets has affected the economy's prospects and policy makers must decide whether the risks between growth and inflation have now shifted.
The outlook has also been importantly affected over the past month by renewed turbulence in financial markets, Bernanke said in a speech in Charlotte, North Carolina late yesterday. The committee will have to judge whether the outlook for the economy or the balance of risks has shifted materially.
He also led a group of analysts in a report forecasting a gradual relaxation of credit concerns in the financial sector over the coming months.
Japan's Inflation
The yen remained higher against the dollar after a Japanese government report showed consumer prices unexpectedly rose for the first time since last December, boosting the central bank's case for interest-rate increases.
Japan's prices are on an uptrend, said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research in Tokyo, a unit of Japan's second-largest brokerage. This raises expectations of the Bank of Japan's next rate increase and should be yen positive.
Japan's currency may rise to 109 per dollar and 160 a euro by year-end, Kameoka forecast.
Housing Slump
The dollar has declined against 15 of the 16 major currencies this year amid the worst housing market slump since 1991 and a credit squeeze that sent three-month interbank borrowing costs to the highest since 2001. Fed policy makers reduced the benchmark rate twice to 4.5 percent to keep the economy out of recession.
The key borrowing rate in the U.K. is 5.75 percent after five increases since 2006, and 4 percent in the euro region after eight increases since 2005.
Futures contracts on the Chicago Board of Trade showed yesterday traders saw a 100 percent chance the Fed will lower its target for overnight loans between banks at least a quarter- percentage point to 4.25 percent on Dec. 11. The chance of a cut to 4 percent is 30 percent.
A separate report today may show the Federal Reserve's preferred gauge of inflation was 1.8 percent in the 12 months through October, according to the median forecast of 29 economists surveyed by Bloomberg News. Fed officials have said they would be comfortable with the reading between 1 percent and 2 percent.
Tuesday, November 27, 2007
Wall Street takes another big hit
Major indexes slide into correction as investors fret that credit crisis could lead to recession.
Stocks tumbled Monday, with the market falling into the technical definition of a correction - a slide of 10 percent off the highs - for the second time in 2007.
The Dow Jones industrial average lost 237 points, or 1.8 percent, falling to a 7-month low. The S&P 500 index lost 2.3 percent and fell into negative territory for the year. The Nasdaq composite fell 2.1 percent.
Treasury prices jumped, lowering the corresponding yields to the lowest levels since mid-2005, as investors sought safety in response to the stock selloff.
Early reports from the nation's retailers were positive, but were soon overshadowed by revived worries that the financial and housing market crisis could send the economy into a recession.
Those worries were sparked by the drop in bond yields and developments in the financial sector.
"The equity market is taking more of its cues from the the bond market these days and the bond market seems to be signaling that we could be in recession," said John Davidson, president and CEO at PartnerRe Asset Management.
Adding to these concerns: news that HSBC Holdings is stepping in to bail out two of its flailing funds, bets that Citigroup could announce big layoffs and analyst downgrades of government-backed mortgage lenders Fannie Mae and Freddie Macslumped on an analyst downgrade.
"The fear is that there is more bad news out there, considering that it continues to dribble out from financial institutions," said Timothy Ghriskey, chief investment officer at Solaris Asset Management.
Ghriskey said that stocks are unlikely to bounce back on a significant level until there is a sense that the bad news is all out in the open.
Here comes the recession
The S&P 500 index "corrected" this summer, dropping more than 10 percent off its 2007 peak to hit that low during the session on Aug. 16, at the height of the credit market panic. The Dow and Nasdaq composite saw declines of just short of 10 percent at that time.
But the Federal Reserve stepped in shortly after, injecting billions into the banking system to loosen up the frozen credit markets, cutting the discount bank lending rate, and ultimately cutting the fed funds rate, which affects consumer loans.
That sparked a broad rally leading through October, when the major gauges peaked again. On Oct. 9, the Dow and S&P 500 ended at all-time highs, while the Nasdaq hit an almost 7-year high on Oct. 31.
Stocks have been sliding since then, as Wall Street pros have cashed out after the rally, and as analysts and investors have begun to worry that the Fed is behind the curve and a recession could be underway.
As of Monday's close, the Dow is down 10 percent from its October high and the S&P 500 is down 10.1 percent. The Nasdaq is off 11.1 percent.
A correction could spell the start of a bigger downturn, or it could prove to be the impetus to bring wary traders back in, starting another wave up.
Ghriskey said he thinks the current "correction" is worse than the one over the summer, and that there is little to suggest a change in direction any time soon.
Cheney: No bailouts, no tax hikes
Early reports on Black Friday and the weekend showed a strong turnout of shoppers, although no big splurgers. Investors were also tracking Cyber Monday results. But the upbeat early signs about consumer spending failed to distract Wall Street from the broader worries.
Tuesday kicks off a big week for economic news, with reports due on consumer confidence, existing home sales, and personal income and spending, among other things.
While those reports are important, investors will especially be looking to the November employment report due the following week and the upcoming Fed meeting, said Ron Kiddoo, chief investment officer at Cozad Asset Management.
The Fed's last scheduled policy meeting of the year is on Dec. 11 and many market watchers are betting that the central bankers will choose to cut the fed funds rate again, to help temper the speed of the economic slowdown.
The fed funds rate currently stands at 4.5 percent. Fed watchers are split about whether the bank will cut the rate by a quarter or half percentage point, or possibly not at all.
On Monday, the Fed's New York branch said it will offer a series of special short-term loans to make sure banks have enough cash available.
Stocks: When to bail
Among other stock movers, E*Trade Financial slipped in active Nasdaq trade after a Wall Street Journal article said that any potential buyout could be delayed by concerns about its weakened mortgage portfolio. On Friday, E*Trade shares jumped on buyout talk.
Citigroup lowered its near-term outlook on the homebuilders, saying it is hard to see when the bottom will be made for the hard-hit industry. Centex (Charts, Fortune 500), Lennarand KB Homewere among the names cited in the report.
On the upside, Dow component Boeinginched higher after Wachovia upgraded the jet maker to "outperform" from "market perform," according to Briefing.com.
But it was one of the few Dow gainers, with 28 out of 30 blue chip stocks falling.
All financial markets were closed Thursday for Thanksgiving, and closed early Friday, with many Wall Streeters making a four-day weekend of it.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by over three to one on volume of 1.50 billion shares. On the Nasdaq, decliners beat advancers by seven to three on volume of 2,01 billion shares.
Treasury prices jumped, lowering the yield on the benchmark 10-year note to 3.83 percent - the lowest level since June 2005 - from 4 percent late Friday. Treasury prices and yields move in opposite directions.
In currency trading, the dollar dipped versus the euro, but held above the all-time low hit on Friday. The greenback fell versus the yen.
U.S. light crude oil for January delivery fell 48 cents to settle at $97.70 on the New York Mercantile Exchange, erasing earlier gains.
COMEX gold for December delivery settled at $826.50 an ounce, down from Friday's close.
Monday, November 26, 2007
Asian Stocks Drop for First Time in Three Days
Asian stocks fell for the first time in three days, led by Samsung Electronics Co., after South Korea's President agreed to an independent probe of corruption allegations involving the country's biggest company.
HSBC Holdings Plc dropped from a one-week high in Hong Kong after Goldman, Sachs & Co. said Europe's biggest bank may have to write down $12 billion more for bad debts. Mitsubishi UFJ Financial Group Inc., Japan's biggest publicly traded lender, reversed earlier losses after Citigroup Inc. said it will raise $7.5 billion by selling a stake to an Abu Dhabi government fund.
There's not much hopeful talk in the market, said Eom Giyo, who helps manage the equivalent of $3.2 billion at Woori Credit Suisse Asset Management Co. in Seoul. Writedowns are increasing at financial institutions, and now we hear allegations of bad accounting at Samsung Group.
The MSCI Asia Pacific Index fell 0.9 percent to 157.02 as of 1:29 p.m. in Tokyo, trimming an earlier decline of as much as 2.1 percent. The benchmark rose 3 percent in the previous two sessions.
Japan's Nikkei 225 Stock Average slipped 0.6 percent to 15,044.96, after earlier sliding as much as 2.2 percent. Sony Corp. jumped after sales of its PlayStation 3 video-game console more than tripled last week as price cuts drew customers after the Thanksgiving holiday.
Benchmarks declined in other markets open for trading, except for New Zealand.
U.S. stocks fell yesterday, sending the Standard & Poor's 500 Index to its biggest drop in more than two weeks. Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, tumbled after UBS AG said higher credit costs will cause earnings growth to slow.
South African Coal Sales to India Jump, Europe Hurt
South Africa's Richards Bay Coal Terminal, the world's biggest coal-export facility, expects a 30- fold surge in sales to India this year, increasing prices for European power producers competing for supplies.
The terminal shipped 7.3 million metric tons to India in the first 10 months, compared with 300,000 tons for the whole of last year, Donovan Raj, the terminal's shipping coordinator, said in an interview Nov. 22. That may rise by another 2 million tons before the end of the year, he said. Richards Bay coal prices have gained 86 percent this year.
Benchmark prices for thermal coal, used in power plants, have reached a record in Australia, South Africa and Europe in the last three weeks. Costs have risen because of shipping and rail bottlenecks as Asian customers compete for supplies with European utilities. Indian coal demand will exceed supply for the next five years, Tata Power Co. said last month.
India is the golden child at the moment, Raj said, speaking from the terminal on South Africa's northeast coast, the biggest single source of coal for European power plants.
Indian Power Minister Sushil Kumar Shinde said Aug. 24 the nation planned to add 78,755 megawatts of capacity in the five- year development plan ending in 2012. That would add 60 percent to the current level, much of it though coal-fired plants.
India in the medium term is going to be a massive importer, said Gerard McCloskey, chairman of U.K.-based consultant McCloskey Group Ltd. Its imports will rise to 100 million tons a year by 2015, from 33 million tons now, he said.
Shipping Potential
Richards Bay's shipping potential will expand to 91 million tons a year by the first half of 2009, from 72 million tons now, said Kuseni Dlamini, the terminal's chief executive officer.
That is a market the world is looking at, Dlamini said. Richards Bay, which has about 3.5 million tons of coal stockpiled at the moment, is owned by mining companies including BHP Billiton Ltd. and Anglo American Plc.
Coal exported from Richards Bay rose to $95.10 a ton, the highest since at least August 2000, in the week ending Nov. 23 according to McCloskey Group. Coal from Newcastle, Australia, rose to a record $88.63 in the week ended Nov. 23.
The jump in prices is encouraging European utilities to buy supplies from the U.S. The power producers are paying more for the shipping than for the coal, London shipbroker Galbraith's Ltd. said this month. Peabody Energy Corp., Consol Energy Inc. and Arch Coal Inc., the three biggest U.S. coal companies, forecast the largest increase in exports in 20 years.
Additional demand is also coming from Japan and South Korea. The nations each bought 300,000 tons of coal through the port this year, compared with none last year.
`Good Returns'
The interest from Asia is helping to sustain prices McCloskey said. It's guaranteeing good returns for anyone involved in the South African coal industry.
BHP is the biggest exporter of coal from South Africa, followed by Anglo and Xstrata Plc.
More than a quarter of western Europe's thermal coal is shipped from Richards Bay, which reported total shipments of 66.5 million tons last year. Exports through October this year were 53.8 million tons, little changed from a year earlier.
November's volumes should total about 5.6 million tons, from 6.48 million tons a year earlier, Raj said.
Derailments of trains run by Transnet Freight Rail, the state rail operator formerly known as Spoornet that delivers coal to the port, and bad weather have hampered shipments, Dlamini said.
Turnover times for ships at the port have been slowed by equipment shortages at the government's National Port Authority.
Helicopter Service
A helicopter used to transfer pilots to ships was replaced in September this year after crashing in 2005, Raj said. In the interim pilots have been transferred by boat, a process that can take four to six hours, instead of the 90 minutes to 2 hours by helicopter, Raj said. The helicopter service is no longer operating at night.
While Richards Bay is the world's biggest coal-export terminal, Australia's Newcastle port ships more of the fuel from two terminals. South Africa is the world's third-biggest thermal coal exporter after Australia and Indonesia.
Saturday, November 24, 2007
U.S. Sales Rose 8.3% Day After Thanksgiving
U.S. consumers spent $10.3 billion on holiday purchases yesterday, an 8.3 percent increase from last year, after retailers promoted electronics and toys to woo shoppers.
Consumers remained resilient and proved they were willing to spend even with oil prices rising and other economic pressures, ShopperTrak RCT Corp. said today in a statement. The day after Thanksgiving, dubbed Black Friday, typically accounts for between 4.5 percent and 5 percent of all holiday sales, the company said.
Holiday sales will increase 3.6 percent this year, the Chicago-based research firm estimates, trailing a 4.8 percent gain last year. Retailers have responded to the anticipated drop by offering discounts on flat-panel TVs and diamond necklaces to lure shoppers.
It's an extraordinary number, beyond what we anticipated, Bill Martin, co-founder of ShopperTrak, said in an interview.
I think there was pent-up demand given the slow sales in October and November because of unseasonably warm weather, and people want to find value for their dollar and reacted to the specials.
ShopperTrak estimates customer visits to stores will drop 2.5 percent this holiday season, which covers the 32 days between Thanksgiving Day and Christmas.
Seeking Bargains
Sales in November and December may rise 4 percent, the slowest gain since 2002, according to the National Retail Federation in Washington. About 55 percent of shoppers said they will spend less this year than in 2006, according to a Discover Financial Services survey.
Consumers flocked to Toys R Us Inc., Wal-Mart Stores Inc., Macy's Inc. and other retailers in the pre-dawn hours yesterday to find bargains on Nintendo Wii game consoles and sterling-silver jewelry.
The day after the U.S. Thanksgiving holiday is called Black Friday because at one time it was considered the day retailers turned profitable for the year.
Kenyata Luckey, a 22-year-old waitress, is spending about $300 this year, half the amount she spent last year, because there aren't as many good deals at Target Corp. and Wal- Mart.
She bought remote-control cars, a Big Wheel bike and stocking stuffers for her son, niece and nephew at an Atlanta Target store at 7:30 a.m. yesterday. A talking-doll set she wanted cost $50, and wasn't on sale, so she didn't buy it.
There are sales, but not on the stuff I wanted, Luckey said.
Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting firm, says the best deals are yet to come.
You've got to move product, Davidowitz said yesterday. And retailers are on a terrible sales trend, so there is no choice but to sell the inventory at what you can sell it at.
ShopperTrak measures foot traffic in shopping centers and malls using more than 45,000 video devices.
Thursday, November 22, 2007
India's Rupee Falls in Longest Losing Streak Since August 2006
India's rupee fell for a fifth day, extending its losing streak to the longest since August 2006, on concern a slide in local stocks will spur investors to take money out of the country.
The currency declined the most in a month after data from the capital markets regulator showed funds based overseas increased sales of local equities this month. The rupee also weakened on concern a rally in oil prices will lift import costs, widening the trade deficit.
The rupee's trend is now closely linked to movements in the stock market, said Paresh Nayar, chief foreign exchange dealer at the Development Credit Bank Ltd. in Mumbai. The rupee has been a bit weak this week as stocks fell and flows turned negative.
The rupee declined 0.4 percent to 39.535 per dollar as of the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. That is the biggest decline since Oct. 22.
The local currency is Asia's second-best performer this year, gaining 12.1 percent. It may rise to 39.25 by year-end and 39 by the end of March 2008, according to the median estimate in a Bloomberg News survey.
The Bombay Stock Exchange's Sensitive Index today declined 0.4 percent to the lowest in almost a month, after falling the most since Oct. 18 yesterday. The MSCI Asia Pacific Index slid 0.6 percent.
Overseas funds sold $951.9 million more Indian shares than they bought this month, after making net purchases of $5.1 billion in October and $4 billion in September, according to the Securities & Exchange Board of India.
Selling Rupees
The Reserve Bank of India has been selling rupees for dollars to stem a rally in the local currency that threatened exports. The dollar purchases boosted its foreign-exchange reserves to a record $270.2 billion on Nov. 9. The central bank bought a record $11.9 billion of foreign currency in September, its 11th straight month of purchases, it said on Nov. 13.
We do intervene in the market, but we would like the exchange rate to be market-determined, central bank Deputy Governor Rakesh Mohan said today in New Delhi.
Growth in merchandise exports slowed to an average 14.4 percent in the eight months to August from 22.4 percent a year ago, government data show.
The rupee also weakened as oil importers bought dollars, Development Credit's Nayar said. The South Asian nation depends on imports to meet as much as three-quarters of its energy needs.
Demand for dollars to pay for imports from refiners such as Indian Oil Corp. may have increased as oil rose to a record high this week. India's state-run refiners need to be protected from rising oil prices, Montek Singh Ahluwalia, deputy chairman of India's Planning Commission, said today in New Delhi.
Crude oil rose as high as $99.29 a barrel in New York yesterday as a weakening dollar boosted demand for commodities. Oil has rallied 50 percent in the past six months, according to data compiled by Bloomberg.
India's trade shortfall averaged $6.2 billion a month in the fiscal year started in April, from $4.3 billion in the year- earlier period, according to government data.
Dollar again hits all-time low vs. euro
Greenback keeps losing ground amid growing unease about U.S. economy.
The dollar hit a new record low against the 13-nation euro on Thursday in thin holiday trading.
The euro spiked to $1.4873 before falling back slightly to $1.4844 in early European trading.
Its previous high of $1.4856 was hit Wednesday, before it settled at $1.4848 in late New York trading.
The dollar was unchanged against the yen, buying ¥108.68 - the same as in late New York trading. The British pound, meanwhile, rose slightly to $2.0652 from $2.0644 the night before.
The Thanksgiving holiday kept many players on the sidelines, while Japanese financial markets will be closed Friday for the Labor Thanksgiving Day holiday.
While the thin holiday trade could invite sudden, sharp moves, traders expected the market to be largely subdued for the rest of the day.
The euro, the pound and other currencies have been climbing steadily against the dollar since August amid fears for the health of the U.S. economy, stoked by the subprime credit crisis.
The dollar has been further weakened by U.S. interest-rate cuts - which can be used to jump-start an economy, but can also weaken a currency as investors transfer funds to countries where they can earn higher returns. The Federal Reserve has already cut rates twice.
China stocks plummet
Worries that Beijing will try to rein in economy send Shanghai index lower 4.4%; Tokyo's Nikkei edges higher.
Most Asian markets fell Thursday, with shares in Hong Kong and Shanghai sliding sharply on concerns that Beijing will take steps to cool China's economy.
The region's biggest bourse in Tokyo ended mixed amid persistent worries over the outlook for the U.S. economy, a vital export market for Asia, after Wall Street dropped again overnight.
There still is a lot of uncertainties in the U.S. economic outlook, as well as on China's macro policies, that could dampen buying interest in the near term, said Peter Lai, a director at DBS Vickers in Hong Kong.
In Hong Kong, the Hang Seng index sank 613.27 points, or 2.3 percent, to 26,004.92 after earlier rising as much as 1.4 percent. Leading decliners were port operator China Merchants Holdings and rival Cosco Pacific.
Some investors held back because of the U.S. Thanksgiving holiday Thursday.
They were were also discouraged by economic data in the U.S. released Wednesday that showed a drop in consumer sentiment, with the Conference Board's Index of Leading Economic Indicators falling 0.5 percent in October. The Dow Jones industrial average fell 1.62 percent Wednesday to 12,799.94.
Asian markets have been battered in recent weeks.
Since reaching record highs in October, benchmark indices in both Hong Kong and Shanghai - two of the world's best-performing markets this year - have fallen 17 percent. In Japan, the Topix index of all the issues of the Tokyo Stock Exchange's First Section, has declined nearly 21 percent from its 2007 high in February.
Some analysts see a buying opportunity.
There are not enough factors to justify a further drop in Japan shares, said Yasushi Hoshi, strategist at Daiwa Securities in Tokyo.
On the Chinese mainland, the Shanghai Composite Index plunged 4.4 percent to 4,984.16 on expectations of further economy-cooling measures. Premier Wen Jiabao suggested earlier this week that China needs to do more to prevent a bubble in stock and property prices.
Concerns over PetroChina's valuation following its Nov. 5 trading debut, when it tripled from its initial public offering price, also dampened buying sentiment. PetroChina lost 4.6 percent Thursday.
Still, traders said the Shanghai index was unlikely to fall much further given the ample liquidity available for share dealings.
What the market lacks isn't cash but confidence, said Simon Wang, an analyst at Xiangcai Securities.
In Tokyo, the benchmark Nikkei stock index rose 0.34 percent to 14,888.77 in a pre-holiday session as the dollar rebounded against the yen from a 2 1/2-year low hit overnight.
But concern over the exposure of insurance companies to the problems in the U.S. mortgage market dragged down the broader Topix index, which dipped 0.09 percent to 1,437.38 points.
Finance Minister Fukushiro Nukaga and Bank of Japan board member Seiji Nakamura both expressed concern about how problems in the U.S. economy might affect Japan. Traders said the market is especially sensitive to the health of consumer spending ahead of Christmas in the U.S.
Japanese trading houses Mitsui & Co. and Sumitomo Corp. were among the gainers.
Katokichi Co. jumped 17 percent to 694 yen after Japan Tobacco Inc. and instant noodle maker Nissin Food Products Co. said Thursday they will jointly buy the frozen food producer in a deal exceeding ¥100 billion (nearly $1 billion) to create Japan's biggest frozen food maker.
In currency dealings, the U.S. dollar was trading at ¥109.00 midafternoon, up from ¥108.68 late Wednesday in New York. It dropped as low as ¥108.25 in the New York session. The euro rose to $1.4860 from $1.4848.
Financial markets in Japan will be closed Friday for the Labor Thanksgiving Day holiday. The markets will reopen on Nov. 26.
Elsewhere, Thailand's benchmark stock index rose 0.2 percent to 808.8, shaking off sour sentiment that dragged it to a 10-week low of 796.9.
Indonesia's main index rose 0.2 percent to 2,569.5 in thin volume.
Malaysian shares fell on concerns over the health of the U.S. economy and high oil prices. The Kuala Lumpur Composite Index fell 1.2 percent to 1,344.2.
Philippine shares continued to fall, weighed down by the heavy losses on Wall Street. The Philippine Stock Exchange Index dropped 0.9 percent to end at 3,478.9, its third day of decline.
South Korean shares fell for a sixth straight session, dropping below the psychologically important level of 1,800 despite gains in the telecommunications sector and exporters such as Samsung Electronics and Hyundai Motor. The Korea Composite Stock Price Index, or Kospi, shed 0.4 percent to finish at 1,799.0.
Australian investors remained nervous over global fallout from the problems with risky housing loans in the U.S. The benchmark S&P/ASX 200 index dropped 0.8 percent to close at 6,334.3, after hitting its lowest level in two months at 6,312.6.
Taiwan shares rose on bargain-hunting. The Weighted Price Index of the Taiwan Stock Exchange rose 0.2 percent to 8,499.4, rebounding from Wednesday's three-month low.
New Zealand stocks fell after sharp drops in the U.S. and U.K. overnight. The NZX-50 index lost 0.4 percent to close at 4,054.2 point.
Wednesday, November 21, 2007
Federal Reserve battles recession fears
Rising oil prices and falling bond yields are making the Fed's job tougher. But Wall Street is still hoping for a rate cut in December and more in 2008.
With oil prices approaching $100 and the yield on the benchmark 10-year U.S. Treasury note briefly dipping below 4 percent Wednesday, Ben Bernanke and his fellow Federal Reserve policymakers find themselves in a serious quandary.
On the one hand, the spike in oil prices could clearly be viewed as a sign of inflation. So that's a good argument for the Fed to keep its key federal funds rate unchanged when it has its next meeting on December 11, some economists say.
However, the spike in oil has the potential to lead to higher gas prices at the pump as well as steeper home heating costs this winter. With that in mind, $100 oil might be more of a tax on consumers and could weaken the economy.
The economy is on the brink of a recession, said Mark Zandi, chief economist with Moody's Economy.com, an independent research firm. Hand wringing about inflation is misplaced. The Fed should be focused on growth. Inflation is not an issue for 2008.
Falling bond yields also paint a gloomier picture of the economy, one of weakness. Bond yields typically fall when the economy is slumping. The yield on the 10-year has slipped from about 4.7 percent in mid-October to its current level. And the subprime mortgage crisis appears to be getting worse.
Several financial institutions, ranging from big mortgage lenders such as Washington Mutual and Countrywide Financial to more diversified banks like Citigroup, Wachovia and Bank of America, have been hit hard by rising delinquencies and mortgage investments gone sour.
The mortgage woes have also led to problems at prominent investment banks such as Merrill Lynch as well as Fannie Mae and Freddie Mac, the two government sponsored enterprises which play an important role in the home buying process since they are the largest purchasers and guarantor of residential loans.
The housing market may not turn around anytime soon either. To that end, the Fed lowered its economic growth forecast for 2008 Tuesday, citing weakness in housing.
And Treasury Secretary Henry Paulson told The Wall Street Journal Wednesday that he expected the potential number of mortgage defaults in 2008 to be significantly bigger than this year. This surprised some market observers since Paulson had previously been more upbeat about the outlook for next year.
This is a significant change coming from Paulson given his optimism previously, said Ken Kim, an economist with Stone & McCarthy Research Associates, a fixed income and economic research firm based in Princeton.
As such, Wall Street now expects the Fed to cut rates by at least a quarter of a percentage point on December 11. What's more, investors are pricing in an 8 percent chance that the central bank will lower rates by a half of a percentage point, to 4 percent, according to fed funds futures listed on the Chicago Board of Trade.
The Fed cut its key federal funds rate, an overnight bank lending rate that influences what consumers pay on various types of loans, by a half-percentage point on September 18 and followed that with a quarter-point cut on October 31.
Still, some market observers and economists are debating what the Fed's next move really should be.
Drew Matus, an economist with Lehman Brothers, argues that the Fed should hold rates steady at its December meeting. He said the Fed needs to assert itself to Wall Street and show that it is more concerned about what's going on in the actual economy, not with stock prices.
Yes, the financial markets are saying that the Fed needs to cut again. But if you look at the economy rather than the financial markets, the economy is in okay shape, he said. Are we going to be rejoicing about the rate of growth? No. But it will be growth and not a decline.
According to the Fed's new outlook, the central bank is predicting that the economy will grow at between a 1.8 percent and 2.5 percent clip in 2008, down from an anticipated growth rate of 2.4 percent to 2.5 percent this year.
Phil Dow, director of equity strategy with RBC Dain Rauscher, also thinks that the economy is in reasonably decent shape.
There is a disconnect. The economic reality isn't as bad as some are indicating, Dow said. A mentor of mine told me that real risk is at its highest when perceived risk is low. But right now, people are afraid of their own shadow.
Dow argues that the recent volatility in the markets has more to do with hedge funds trying to lock in gains following a strong market rally from mid-August through late October and is not a sign that Wall Street now thinks a recession is imminent.
He added that once banks report their fourth-quarter results in January, which he believes will include a kitchen sink of charges and writedowns related to the mortgage meltdown, market sentiment may finally begin to improve.
Nonetheless, Dow thinks the Fed will, and should cut rates by a quarter-point. He thinks the Fed would send the wrong message, however, by slashing rates by a half-point.
A half-point cut on top of all the negative news would just make things worse, he said.
But Zandi thinks a half-point cut is not out of the question, especially if stocks continue to decline. He also said the Fed might need to consider cutting its discount rate, a largely symbolic rate that determines how much banks pay when borrowing directly from the Federal Reserve, before the December 11 meeting.
The Fed did exactly that in August, lowering the discount rate by a half-point in an unscheduled meeting. It lowered the discount rate again in September and October along with the federal funds rate.
But there still is the issue of oil prices and the weak dollar. If the Fed continues to lower interest rates, that could help the economy by restoring confidence in the financial system, particularly the mortgage market.
It comes at a cost, however, as more rate cuts could put further upward pressure on oil and downward pressure on the dollar. That might be a risk the Fed needs to take though.
Oil and the dollar could throw a monkey wrench in the Fed's plans but if you put everything together, rising oil prices should eventually crimp demand and that should keep inflation under wrap, Kim said.
As for the dollar, it would weaken further with rates going lower but it's a consequence the Fed would have to accept because at the end of the day, the Fed is trying to promote maximum employment as well as stable prices, Kim added.
And Lehman's Matus said the weak dollar is actually having some big benefits. In fact, he believes that it might be what keeps the economy from slipping into a recession in 2008. He said that if consumer spending slows in 2008 because of the mortgage crisis and corporations also pull back on spending, robust exports to countries with stronger currencies could be the economy's salvation.
The exports side is what saves us. One of the implications of the Fed cutting rates would be keeping exports up with a weak dollar, Matus said.
With that in mind, even though Matus does not think the Fed will cut rates in December, he does believe the Fed will lower rates several times next year, perhaps to as low as 3.75 percent.
But Stefane Marion, assistant chief economist with National Bank Financial in Montreal, said that as long as more bad news keeps coming out of financial institutions, the Fed should be even more aggressive.
We're in unchartered territory because of what we are seeing with Fannie and Freddie. It is difficult to assess what the final end point is in this scenario, Marion said. He argues that the Fed could cut rates several times in 2008, bringing them perhaps as low as 3 percent by next summer.
Dow at 7-month low
Blue chips close at lowest point since April on worries about mortgage and credit markets and the surge in oil prices. Markets closed for Thanksgiving.
Stocks slumped Wednesday, with the Dow closing at a 7-month low, as worries about the credit and mortgage market and higher oil prices hit investors hard ahead of what for many will be a long holiday weekend.
Treasury prices rallied, the dollar fell, oil prices edged lower and gold prices rose.
The Dow Jones industrial average lost 211 points or 1.6 percent. That set the Dow at its lowest point since April 17, when it ended the session at 12,773.04.
The S&P 500 index lost 1.6 percent and the Nasdaq composite lost 1.3 percent.
The stock selloff was very broad, with homebuilders, banks, mortgage lenders and technology shares leading the decline.
Financials and housing have been a wet blanket on the entire market, said Richard Sparks, senior equities analyst at Schaeffer's Investment Research. We're seeing the weight of the subprime worries and the credit crunch coming home to roost.
All financial markets are closed Thursday for Thanksgiving and Friday's abbreviated session ends at 1:00 p.m. ET. Attendance Friday is expected to be low and trading volume light.
Despite the minimal market action on that day, Friday is key for stocks and the economy in that it is Black Friday, the kickoff for the critical holiday shopping season.
Worries about consumer spending, which fuels roughly two-thirds of the economy, have played a big role in the recent stock market decline. Therefore, the results from retailers will be significant in determining whether stocks rebound in December or fall further.
Everyone is going to be keying on the retail numbers and that could come down on either side of the fence, Sparks said.
If you have a poor start to the Christmas Season, you have real evidence of the economic slowdown, he said. But if the consumer is resilient - although it may cause worries that the Fed won't have a good reason to cut rates - it might also placate investors worried about a recession.
Stocks have been whipsawed lately as investors have muddled through the ongoing housing and credit market turmoil, eyed the weak dollar and fretted over oil prices near $100 a barrel. On Tuesday the Fed issued a sluggish 2008 economic outlook, confirming other recent signs of a slowdown.
Wednesday's index of leading economic indicators and consumer sentiment readings added to the lackluster growth outlook.
Additionally, the Mortgage Banker's Association reported a 3.6 percent drop in applications last week. Separately, 47 of the 50 states saw a drop in existing home sales in the third quarter, according to a National Association of Realtors report.
Equity markets are reacting to the economic slowdown, said Michael Strauss, chief economist at Commonfund. There is some worry about the consumer, about discretionary business spending and about the financial sectors of the economy.
He said that there may also be some worry that the Federal Reserve is behind in addressing these issues, as was reflected by the steep decline in Treasury bond yields Wednesday.
Treasury prices jumped, lowering the corresponding yields, as investors sought safety in the safer haven of bonds. The rally sent the benchmark 10-year note below 4 percent, during the session, for the first time in two years.
There's a pretty strong flight-to-quality there, Strauss said. There's a clear bet that the Fed has further to go, even if the Fed doesn't realize it.
Policy makers meeting on Dec. 11 are widely expected to cut the fed funds rate, a key short-term interest rate by a quarter-percentage point.
Among stock movers, Freddie Mac shares continued to slip after plunging nearly 27 percent Tuesday. The government-sponsored mortgage backer reported a steep quarterly loss Tuesday and a $1.2 billion writedown due to credit losses.
Fellow mortgage lenders Countrywide Financial and Washington Mutual slipped too, while Fannie Mae bounced back after sliding through the morning.
Big banks slumped, including Merrill Lynch, Lehman Brothers and Morgan Stanley.
Declines were broad based, with 29 out of 30 Dow components falling, led by AIG, American Express, JP Morgan, General Electric and Intel.
Intel was one of many chips falling, including Advanced Micro Devices and Micron Technology. Micron slumped for a second session after a Morgan Stanley analyst initiated coverage of the company Tuesday with an underweight rating, AP reported.
The Dow's lone advancer was GM, which recovered from a steep morning selloff after reports said that GMAC, its struggling former finance unit, is taking steps to keep its mortgage unit alive.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost three to one on volume of nearly 1.61 billion shares. On the Nasdaq, decliners topped advancers by seven to three as 2.07 billion shares changed hands.
Federal Reserve battles recession fears
In economic news, the October index of Leading Economic Indicators (LEI) fell 0.5 percent, after rising 0.1 percent in the previous month, suggesting that the economic slowdown could accelerate in the months ahead. Economists surveyed by Briefing.com thought LEI would fall 0.3 percent.
The November consumer sentiment index from the University of Michigan showed a rise to 76.1 from an initial reading of 75.0, but was down from last month's 80.9. Economists thought it would hold steady, on average.
The number of Americans filing new claims for unemployment last week fell by 11,000, as expected.
U.S. light crude oil for January delivery fell 74 cents to settle at $97.29 a barrel on the New York Mercantile Exchange, after having hit a record high of $99.23 in electronic overnight trading.
Oil prices were volatile after the release of the weekly oil inventories report, which showed a surprise drop in crude supplies.
COMEX gold for December delivery rose $7.20 to settle at $798.60 an ounce.
Tuesday, November 20, 2007
Oil Surges Above $99 as Weaker Dollar Spurs Commodity Demand
Crude oil rose above $99 a barrel for the first time in New York as a weakening U.S. dollar increased demand for commodities.
Oil, gold and silver gained as the dollar fell yesterday to a record low against the euro on speculation that the Federal Reserve will lower interest rates for a third time this year. Oil gained after Royal Dutch Shell Plc said a fire more than halved output from a 155,000 barrel-a-day oil-sands plant in Alberta, potentially cutting shipments to U.S. refineries.
Oil has become a hedge for investors and the weaker U.S. dollar has contributed to the rise in gold and oil, said Victor Shum, senior principal at consultants Purvin & Gertz Inc. in Singapore. The price strength in oil is also supported by the tight fundamentals.
Crude oil for January delivery climbed as much as $1.26, or 1.3 percent, to a record $99.29 a barrel in after-hours electronic trading on the New York Mercantile Exchange. The contract was at $98.90 at 11:11 a.m. in Singapore.
The contract climbed $3.39, or 3.6 percent, to $98.03 a barrel yesterday, the highest close since trading began in 1983.
Brent crude oil for January settlement gained as much as $1.04, or 1.1 percent, to $96.53 a barrel on the London-based ICE Futures Europe exchange, the highest since trading started in 1988. It was at $96.20 at 11:11 a.m. Singapore time.
Nobody wants to sell, said Tom Hartmann, commodity broker at Altavest Worldwide Trading Inc. in Mission Viejo, California. Oil has its own bullish factors but on top of that, with the weaker dollar, prices kind of have to go up, he said.
Dollar, Heating Oil
The dollar touched $1.4854 per euro yesterday, the lowest since the 13-nation currency was started in 1999. U.S. Federal Reserve policy makers yesterday lowered their growth forecast for 2008 on concern that the housing slump and credit market losses risked slowing growth in the world's biggest economy.
The financial pundits all interpreted that to mean the Fed might cut interest rates again in December and that would further weaken the dollar, said Purvin & Gertz's Shum.
West Texas Intermediate, the New York-traded crude-oil benchmark, is up 61 percent this year. Oil has gained 43 percent in euros, 53 percent in British pounds and 49 percent in yen.
Crude also gained as distillate fuel prices surged to a record the day before an Energy Department report that may indicate supplies declined last week. Oil demand typically peaks in the fourth quarter during the Northern Hemisphere winter.
Gasoline Surges
U.S. retail unleaded gasoline prices have climbed above $3 a gallon, reaching as high as $3.11 on Nov. 14, a level not seen since June. About 38.7 million people will travel more than 50 miles for the Thanksgiving holiday tomorrow, according to the American Automobile Association, more than the previous mark of 38.1 million last year.
Distillate-fuel stockpiles, which include heating oil and diesel, probably dropped 450,000 barrels, according to the median of 16 analyst estimates in a Bloomberg News survey. The futures also rose as forecasters said most of the U.S. will experience below-normal temperatures over the next two weeks.
Heating oil for December delivery rose 1.59 cents, or 0.6 percent, to a record $2.7060 a gallon on the New York Mercantile Exchange at 10:40 a.m. Singapore time. It rose 3.3 percent, to settle at $2.6901 yesterday and is up 61 percent from a year ago.
Inventories
An Energy Department report today is expected to show that U.S. crude-oil inventories rose a second time, gaining 750,000 barrels last week, according to the median estimate from a Bloomberg News survey of 16 analysts.
There will be no floor trading in New York tomorrow because of the Thanksgiving holiday in the U.S.
Trading volumes the past three sessions have been light and prices would have probably fallen yesterday had it not been for the weak dollar, Altavest's Hartmann said. Light trading again today is likely to exaggerate any reaction to the inventory data.
We could be in for a wild day, he said. We could have a big exhaustion tail where people take profits before the long weekend.
Yen Rises as Subprime Losses Spur Higher-Yielding Asset Sales
The yen rose against 16 of the most- actively traded currencies as losses related to U.S. subprime mortgages widened, prompting investors to sell higher-yielding assets funded by loans made in Japan.
The currency gained the most versus the Australian and New Zealand dollars as Freddie Mac, the second-biggest U.S. mortgage- finance company, reported a record loss and the Federal Reserve reduced its 2008 economic growth forecast. Crude oil rose above $99 a barrel, which may slow consumer spending and put pressure on the central bank to cut interest rates.
Subprime problems are far from done, said Saburo Matsumoto, senior manager of foreign-exchange sales at Sumitomo Trust & Banking Co. in Tokyo, Japan's fifth-largest lender by assets. The yen is being buoyed by it.
The yen climbed to 162.58 per euro as of 12:30 p.m. in Tokyo from 163.21 in New York yesterday. It was at 109.64 against the dollar from 109.97. The dollar traded at $1.4828 per euro, after reaching $1.4852 yesterday, the lowest since the single European currency's debut in 1999.
Japan's currency may rise to 107 per dollar this year, Matsumoto said.
Australia's dollar slipped to 97.27 against the yen from 98.13, New Zealand's dollar weakened to 83.46 from 84.15, and South Korea's won declined to 11.847 from 11.945.
Default Swaps
The risk of owning debt of financial firms from Citigroup Inc. to Bear Stearns Cos. rose on concern that credit-market losses will increase, according to credit-default swaps, which are used to speculate on the ability of companies to repay their debt. Countrywide Financial Corp., the biggest U.S. mortgage lender, denied it will file for bankruptcy linked to speculation of a cash shortage.
The yen will remain strong on the back of risk reduction, said Hiroshi Sudo, senior manager in the department of solution and sales at Central Tanshi Online Trading Co., Ltd., a Tokyo-based foreign-exchange margin trader that handles 45 billion yen ($409 million) in customers' money.
Japan's currency may rise to 105 per dollar in January, Sudo forecast.
The yen gained 5.7 percent against the Korean won this quarter, 4.8 percent versus the Australian dollar and 4.2 percent against New Zealand's, as the countries' interest-rate premiums made them attractive for so-called carry trades.
Dollar Losses
The dollar may extend losses as traders bet the Fed will cut interest rates a third time to keep the economy from slipping into recession. The U.S. consumes one quarter of the world's oil, the price of which has risen 62 percent this year to a record.
Reports today may show the Commerce Department's index of for the U.S. economic outlook fell in October and the Reuters/University of Michigan's final consumer confidence gauge stayed at a two-year low this month.
The U.S. Dollar Index traded on ICE Futures U.S. in New York, which measures the currency against six major counterparts including the euro, yen and British pound, reached a record low of 74.978 on Nov. 9, the weakest since the index started in 1973. It last stood at 75.155. The U.S. currency was also near an all- time low versus the Swiss franc.
The most likely path for the dollar into the year-end remains down, said John Horner, a currency strategist in Sydney at Deutsche Bank AG, the world's largest currency trader. The Fed will probably respond to weaker growth with a further lowering of rates.
The dollar dropped to a record low of 1.1055 versus the Swiss franc before trading at 1.1060 from 1.1058 yesterday. The U.S. currency will decline to $1.50 versus the euro by the end of the year, Horner forecast.
Japan's Exports Rise to Record on Asia, Europe Demand
Japan's exports rose to a record in October as companies shipped more cars and electronics to Asia and Europe, easing concern that a slowdown in the U.S. will cool the economy's expansion.
Exports climbed 13.9 percent from a year earlier, the Finance Ministry said in Tokyo today, double September's pace. That helped lift the trade surplus 66.1 percent to 1.02 trillion yen ($9.3 billion) as imports gained 8.6 percent.
Shipments to China and the European Union surged to the highest ever, cushioning a drop in exports to the U.S., where the worst housing recession since 1991 is crimping demand. Toyota Motor Corp.'s profit rose 11 percent last quarter, helped by sales of Camry sedans in Europe and Asia.
Exports will probably remain the main driver of Japan's economic recovery this quarter, said Susumu Kato, chief economist at Calyon Securities in Tokyo. Demand in Asia and Europe will compensate for a slowdown in shipments to the U.S. for the time being.
The trade surplus will be tested this month as the yen's rise to a 1 1/2-year high against the dollar hurts exporters and oil approaching $100 a barrel increases the nation's import bill. Oil climbed above $99 for the first time in New York today.
Japan's currency has gained 5.3 percent against the dollar and 2.9 percent versus the euro this month. It traded at 109.62 per dollar at 12:29 p.m. in Tokyo from 109.83 before the report.
China, Asia
Shipments to China increased 19.2 percent to a record 1.17 trillion yen in October, faster than the 16.4 percent in the previous month, the ministry said. Export growth to Asia accelerated to 12.9 percent from a year earlier.
Manufacturers have turned to China and India, the fastest growing major economies, to shield them from a slowdown in the U.S., where a fifth of Japan's exports are sent. Toyota increased sales in China by 57 percent in the three months ended Sept. 30, helping offset a 5 percent decline in the U.S.
Freddie Mac: $8.1 billion writedown
Government-backed mortgage finance firm becomes the latest to feel the bite of credit market woes as losses soar.
As Freddie Mac reported a rough quarter, the company's CEO said the troubled housing market will take time to turn around.
Mortgage financing firm Freddie Mac rocked the credit markets further Tuesday as it reported a large loss along with an $8.1 billion drop in the value of its assets, as it set aside $1.2 billion to cover credit losses.
The firm reported a net loss of $2 billion, or $3.29 a share, in the period, wider than the loss of $715 million, or $1.17 a share, a year earlier.
Analysts surveyed by earnings tracker Thomson First Call had forecast that Freddie would trim losses to 22 cents a share in the period.
Shares of Freddie Mac plunged about 13 percent in pre-market trading immediately following the report.
While problems in the mortgage markets have been well-known for months, it had been hoped that Freddie Mac, which buys securities backed by the safest form of mortgages, would be spared the worst of the problems.
But Tuesday's report shows that the problems appear to be spreading. Freddie said that 0.51 percent of its single-family home loans were 90 days or more delinquent in September, up from 0.42 percent in June.
Without doubt, 2007 has been an extremely difficult year for the country's housing and credit markets and, as our third quarter financial results reflect, we have been impacted by the deterioration in these markets, said a statement from Chief Executive Richard Syron. Freddie Mac is a housing finance company operating in what today is a troubled housing and credit market. It will take time for this market to turn around.
Longer term, Syron said, Freddie Mac's outlook should be helped by the move by lenders to fixed-rate loans and away from variable-rate loans made to riskier borrowers.
Still, the company's financial statements included further signs of trouble beyond the decreased value of its assets and the increasing hit from loan losses.
Freddie said in order to meet the mandatory target for capital surplus, it has hired Wall Street firms Goldman Sachs and Lehman Brothers to help it consider very near term capital-raising alternatives. It said it might also need to slash its dividend by 50 percent and that it could be forced to limit the growth or reduce the size of its retained portfolio, slow purchases into its credit guarantee portfolio or issue additional preferred or common stock.
On Nov. 9, the other government-sponsored mortgage finance firm, Fannie Mae, reported lower earnings that raised questions about its accounting. Shares of Fannie have fallen nearly 25 percent since that report, and Freddie had fallen nearly 15 percent during the same period through the close of trading Monday.
Monday, November 19, 2007
Yen Near 1 1/2-Year High Versus Dollar on Credit-Market Risks
The yen traded near a 1 1/2-year high versus the dollar as concern increased that credit-market losses will slow global economic growth, pushing investors to sell higher-yielding assets funded by loans in Japan.
Japan's currency rose against the Australian and New Zealand dollars, favorites of the carry trade, after stocks fell in the U.S. and futures showed equities in Tokyo are likely to decline today. Japan has the lowest benchmark interest rate among industrialized nations. Demand for the dollar may weaken on expectations a government report today will show U.S. housing starts dropped to a 14-year low in October.
This will be a good day for the yen, said Paul Milton, chief dealer at Societe Generale SA in Sydney. Asian stocks are likely to catch up with U.S. equities.
The yen traded at 109.74 per dollar at 7:57 a.m. in Tokyo from 109.76 late in New York yesterday. The yen rose to 109.13 per dollar on Nov. 12, the highest level since May 2006, and may advance to 109.30 today, Milton said. Japan's currency was little changed at 160.96 per euro from 160.95 yesterday. The dollar traded at $1.4664 per euro from $1.4665.
The yen climbed against all 16 of the world's most-active currencies yesterday as Goldman Sachs Group Inc. said in a report that Citigroup Inc., the largest U.S. bank by assets, may write down $15 billion in collateralized debt obligations over the next two quarters.
The Standard & Poor's 500 Index fell 1.8 percent yesterday. Nikkei 225 Stock Average futures due in December traded at 14,765 in Chicago, compared with the index's close yesterday in Tokyo of 15,042.56. The two-year Treasury note's yield fell to the lowest since 2005 as investors sought safety in U.S. government debt.
Yen Strength
The market is very nervous, said Jonas Thulin, a senior currency strategist at Calyon Securities Inc. in New York. People are holding a sober view that we haven't seen the worst from the subprime and credit issue yet. It pushed people to buy the yen and sell risky assets.
The yen has strengthened against all 16 most-traded currencies this month, gaining 12 percent versus Australia's dollar and 8.3 percent against New Zealand's.
In carry trades, investors borrow money in low-yielding economies such as Japan and lend the funds in high-yielding countries to profit from the spread. The risk is that currency moves wipe out earnings. When the trade weakens, traders sell higher-yielding assets and buy yen to repay borrowings.
The benchmark rate in Australia is 6.75 percent while New Zealand's is 8.25 percent. Japan's borrowing cost is 0.5 percent.
Jitters in the market contributed to the strengthening in the yen, said Stephen Malyon, a currency strategist at Scotia Capital Inc. in Toronto.
U.S. Housing Starts
The U.S. currency weakened to an all-time low of $1.4752 per euro on Nov. 9. The dollar has lost 10 percent against the euro and 7.8 percent versus the yen this year as two rate cuts by the Federal Reserve dimmed the allure of U.S. assets.
Today's Commerce Department report will show housing starts fell to an annualized rate of 1.17 million in October, from 1.19 million during September, according to a Bloomberg survey. The data is scheduled for release at 8:30 a.m. Washington time.
The Fed is scheduled to release the minutes from its Oct. 31 meeting at 2 p.m. in Washington. The central bank cut the target rate for overnight loans between banks to 4.5 percent last month, after a 50-basis-point reduction in September. The central bank is also expected to release quarterly forecasts for the economy and inflation.
Futures traded on the Chicago Board of Trade show the odds of the Fed cutting interest rates a quarter-percentage point to 4.25 percent on Dec. 11 are 96 percent, compared with 72 percent a month ago.
Spread Narrows
The National Association of Home Builders/Wells Fargo index of builder confidence held at 19 for a second month in November, the lowest since records began in 1985, the Washington-based association said yesterday.
The yield advantage of U.S. two-year Treasuries over comparable-maturity Japanese government debt shrank to 2.41 percentage points, the narrowest since October 2004, making U.S. assets less attractive to international investors.
Goldman's Global Alpha May End 2007 Down $6 Billion
Goldman Sachs Group Inc.'s Global Alpha hedge fund may lose about $6 billion in assets this year, a 60 percent decline, because of trades that went awry and client withdrawals, according to two investors.
Global Alpha, which entered 2007 with more than $10 billion, lost 37 percent on investments through Nov. 14, most of it in August, said the Goldman clients, who asked not to be identified because the fund's performance is private. The New York-based company has about $2 billion in fourth-quarter redemption notices, on top of withdrawals through the year.
Goldman, the world's most profitable securities firm, said last month it won't shut down Global Alpha, a quantitative fund whose managers, Mark Carhart and Raymond Iwanowski, use computer models to select trades. The fund generated $700 million in fees in 2006, after returning almost 40 percent the previous year.
Goldman as a firm would like not to have the reputation of shutting things down, said Geoffrey Bobroff, an independent investment consultant in East Greenwich, Rhode Island. Smaller isn't necessarily bad.
Christopher Williams, a Goldman spokesman, declined to comment.
Global Alpha fell 22.5 percent in August, hurt by wrong-way stock and currency bets. Other Goldman quant funds lost money that month, including the $7.5 billion Global Equity Opportunities, which declined 23 percent.
Goldman pumped $2 billion of its own money into Global Equity in the middle of the month and raised an additional $1 billion from investors such as billionaires Eli Broad and Maurice Hank Greenberg, former chairman of American International Group Inc.
Asian Stocks May Drop for a Fourth Day on U.S. Spending Outlook
Asian stocks may fall for a fourth day after Lowe's Cos. cut its earnings forecast and an increasing number of economists said the U.S. may enter a recession, raising concern spending will slow in the world's biggest economy.
Financial companies including Kookmin Bank, South Korea's biggest, may decline after Goldman, Sachs & Co. recommended investors sell shares of Citigroup Inc.
Japanese exporters may also drop after the yen strengthened against the dollar. Companies dependent on the U.S. market for sales and profit such as Honda Motor Co. may fall.
U.S. stocks dropped to three-month lows yesterday with the Standard & Poor's 500 Index sliding 1.8 percent and the Dow Jones Industrial Average dropping 1.7 percent.
There's no escaping the negative impact from the tumbling U.S. market, said Terunobu Kinoshita, who helps manage $785 million at Fund Creation Co. in Tokyo. If U.S. consumer spending starts to deteriorate, stocks here will be subject to another round of selling.
Australia's S&P/ASX 200 Index fell 1.8 percent to 6,415.90 as of 10:47 a.m. in Sydney.
Nikkei 225 Stock Average futures expiring in December fell 2 percent to 14,805 in Singapore, down from the close of 15,060 in Osaka and 15,040 in Singapore yesterday. The Bank of New York Asia ADR Index, which tracks the nation's American depositary receipts, slid 2.8 percent.
Citigroup Downgrade
U.S.-traded receipts of Kookmin Bank plunged 4.2 percent from the closing share price in Seoul yesterday. Those of Honda, which gets more than half of its revenue from North America, declined 2.7 percent. Receipts of Sumitomo Mitsui Financial Group Inc., Japan's third-biggest publicly traded lender, lost 3.3 percent.
Citigroup, the biggest U.S. bank, was lowered to sell by Goldman on the view that the lender's writedowns of collateralized debt obligations may total $15 billion over the next two quarters. That would be in addition to the $11 billion in writedowns already announced this month. Citigroup's shares plunged 5.9 percent to the lowest level since February 2003.
In Japan, Sumitomo Mitsui reported a 30 percent decline in first-half net income as the company took a charge of 32 billion yen ($292 million) on subprime mortgage investments. The bank also wrote down the value of a stake in OMC Card Inc. after that company lost almost half its market value in the two months after the acquisition.
U.S. Recession?
Lowe's, the second-largest U.S. home improvement retailer, slashed its full-year profit forecast for the second time in as many months because of the slumping housing market. Meanwhile, the number of economists forecasting the U.S. will slip into recession almost doubled over the last two months, a survey by the National Association for Business Economics showed.
U.S. consumers plan to spend less this year on holiday shopping, according to a survey by the Consumer Federation of America and the Credit Union National Association said today.
The yen strengthened to 109.74 versus the dollar, from 110.38 at the close of trading in Tokyo yesterday. Against the euro, Japan's currency recently traded at 160.99 from 162.01 yesterday. A stronger yen decreases the value of Japanese exporters' dollar-denominated sales when converted into local currency.
BHP Billiton Ltd., the world's largest mining company, slid 3.8 percent. Mitsui & Co., Japan's second-largest trading company, and Sumitomo Metal Mining Co., Japan's biggest nickel maker, may drop.
Copper futures plunged 5.4 percent in New York, the lowest closing price for a most-active contract since March 21. Gold, silver and crude oil prices also fell yesterday.
Olympus Corp., the world's biggest maker of endoscopes, may be active after the company agreed to buy Gyrus Group Plc for about 935 million pounds ($1.9 billion) in cash to expand its medical business.
Japan Tobacco Inc., the world's third-biggest maker of cigarettes, may climb. The company will make a bid for frozen- food processor Katokichi Co. and then sell a 49 percent stake in the company to Nissin Food Products Co., the Nikkei newspaper reported.
Citigroup seen taking $15B in writedowns
Goldman Sachs analyst expects the bank's writedowns to spread over the next two quarters and foresees a possible dividend cut.
Citigroup Inc. was added to Goldman Sachs "Americas Sell List" Monday morning by analyst William Tanona, as he expects the company to take as much as $15 billion in writedowns and possibly cut its dividend.
The writedowns, which are likely to be spread over the next two quarters, stem from Citigroup's exposure to complex financial instruments known as collateralized debt obligations. So-called CDOs combine slices of assets and other debt.
Many CDOs are, in part, backed by subprime mortgages - loans given to customers with poor credit history. As those loans have gone increasingly into default, the value of CDOs has declined, forcing banks to take billions of dollars in writedowns.
Tanona said deteriorating housing and consumer metrics will likely depress earnings in other areas of business, including retail banking and credit card divisions.
Citigroup might also be forced to lower its dividend or look for new sources of funding to help maintain adequate capital ratios, Tanona wrote in a research note.
Furthering the current problems is Citigroup's lack of leadership, Tanona said. Citigroup's chief executive, Charles Prince, was forced into retirement earlier in the month after the bank took more than $6 billion in writedowns in the third quarter. It plans to write down an additional $8 billion to $11 billion in the fourth quarter.
Shares of Citigroup fell 2.8 percent, to $33.06 in pre-market trading. Shares have traded between $31.05 and $57 during the past year.
Sunday, November 18, 2007
Industrial production nosedives
Largest plunge in nine months, led by electricity, gas, auto and housing weakness; rate cut more likely if conditions worsen, analysts say.
Industrial production plunged in October by the largest amount in nine months, reflecting a big drop in utility output and continued troubles in auto and housing-related industries.
The Federal Reserve said that output at the nation's factories, mines and utilities fell by 0.5 percent last month, a much worse outcome than had been expected.
The October decline, the biggest since a similar drop in January, was led by a sharp plunge in output of electricity and natural gas due to warmer-than-normal weather during the month.
Also contributing to the weakness was the third straight drop at auto factories and further weakness in industries producing lumber, appliances and other products tied to housing.
Auto makers are struggling with slumping demand in the face of soaring gasoline prices while housing is enduring its worst slump in more than two decades.
Analysts believe that the economy will slow significantly in the current quarter and the first three months of next year, with many raising the odds for a recession.
The Federal Reserve has cut interest rates twice since September but Federal Reserve Chairman Ben Bernanke sought to lower expectations for further rate cuts to boost economic growth. He said that Fed policymakers see the risks of weaker economic growth as roughly balanced with the risks of higher inflation that could be triggered by the latest surge in oil prices. That surge pushed the price of a barrel of crude oil briefly above $98 per barrel last week.
Still, many analysts believe that if the economic slump worsens, the Fed will cut interest rates again, possibly as soon as its next meeting on Dec. 11.
Manufacturing output fell by 0.4 percent in October, the biggest drop since a 0.4 percent decline in August.
Output at the nation's utilities was down 1.6 percent. Mining output, a category that includes oil production, fell 0.6 percent.
The declines left factories, mines and utilities operating at 81.7 percent of capacity last month, down from an operating rate of 82.2 percent in September.
European Stocks Drop for Third Week
European stocks slumped to their lowest in almost two months this week, paced by commodity producers as metal and oil prices fell.
Boliden AB, Europe's third-biggest copper refiner, and Anglo American Plc, the world's second-largest mining company, led commodity stocks lower. Porsche AG dropped as the weak dollar hurt the value of U.S. sales translated into euros.
The picture is dimming for commodity stocks, said Herbert Perus, who helps oversee the equivalent of $57 billion as head of global equities at Raiffeisen Capital Management in Vienna. The word recession is heard more and more often from the U.S. It's a very sentiment-driven market with a lot of scared investors.
The Dow Jones Stoxx 600 Index declined 1.3 percent this week. The benchmark has fallen 9 percent since reaching a 6 1/2- year high June 1 because of concern defaults among U.S. mortgage borrowers with the poorest credit profiles will hurt the rest of the economy.
It's reasonable to stay out of the energy sector as oil is clearly at a peak and companies benefiting from high crude prices are going to have a negative impact going forward, said Giorgio Mascherone, chief investment officer at Deutsche Bank SpA in Milan, which manages the equivalent of $46 billion.
Stoxx 600 basic resources shares lost 7 percent this week, the biggest decline in more than 3 months.
Crude Declines
Crude prices fell 1.8 percent this week in London after imports increased to 10.5 million barrels a day last week, the highest in almost three months, and added an extra 2.81 million barrels to U.S. crude-oil stockpiles, the Energy Department said Nov. 15. A 750,000 barrel-decline was forecast by analysts.
Zinc dropped to the lowest in almost 20 months. Lead slid to an eight-week low.
National benchmarks fell in 14 of the 18 western European markets. Germany's DAX Index lost 2.6 percent for the week, France's CAC 40 was little changed. The U.K.'s FTSE 100 fell 0.2 percent. The Stoxx 50 decreased 0.4 percent, and the Euro Stoxx 50, a measure for the euro region, also retreated 0.4 percent.
Boliden dropped 11.5 percent this week, as did Anglo American.
Kloeckner & Co. AG fell 6.3 percent. The German steel trader said Nov. 14 nine-month profit dropped after steel prices slumped. Prices have held steady this quarter, the company said. Net income dropped 35 percent to 114.6 million euros ($168 million).
Cold-rolled stainless steel, which is used in electrical appliances and construction, has fallen 30 percent in the past six months to 950 euros a metric ton, according to data from Steel Business Briefing. Kloeckner said it expects prices to remain stable or to rise slightly on good demand.
ThyssenKrupp AG, Germany's largest steelmaker, lost 9.2 percent and Salzgitter AG, the country's second-biggest, declined 9 percent.
Norsk Hydro ASA, the world's fourth-largest aluminum producer, retreated with the price of the metal. The stock declined 9 percent. Aluminum dropped 2.3 percent, the biggest weekly loss in more than a month.
Basic resources have been one of the most volatile sectors in the recent past, due to the underlying metal prices, which have been riding the roller coaster, said Christoph Berger, a fund manager at Cominvest Asset Management in Frankfurt, who helps manage $63 billion of European stocks.
Porsche AG, maker of the 911 sports car, lost 15 percent. The carmaker's main auto operations fell short of analysts' estimates. Operating profit fell to about 1 billion euros in the 12 months through July from about 1.2 billion euros a year earlier, excluding gains from its stake in Volkswagen AG, Porsche said Nov. 12.
Earnings were partly curbed by the weaker dollar. UBS AG said Nov. 13 a decline in the U.S. currency hurt the company's full-year income more than expected.
K+S AG plunged 12.2 percent after Europe's largest producer of potash used in fertilizers cut its profit forecast. A sliding U.S. dollar erodes the outlook for operating income and sales this year. Syngenta AG, the biggest maker of agricultural chemicals, and Yara International AG, the largest fertilizer maker, also fell this week after K+S cut full-year estimates.
Alfa Laval AB tumbled 22.4 percent after the world's largest maker of heat exchangers said orders missed projections last month.
Vodafone Group Plc rose 6.7 percent. The world's biggest provider of mobile-phone services on Nov. 13 raised its sales and profit forecasts on accelerating growth in India and Turkey, as well as higher revenue from wireless Internet access in Europe.
Net income in the six months to Sept. 30 was 3.29 billion pounds ($6.8 billion), or 6.19 pence a share, compared with a year-earlier loss of 5.1 billion pounds, or 8.88 pence, Vodafone wrote Nov. 16 in a statement. Profit beat the median estimate of 3.03 billion pounds in a Bloomberg News survey of analysts.
Vodafone is a good performance indicator for the entire telecommunication services market, said Cominvest's Berger.
Barclays Plc led gains by bank stocks after the U.K.'s third-biggest lender wrote down about 1.3 billion pounds of credit-related securities tied to the U.S. subprime-mortgage market collapse.
Net charges and writedowns were 500 million pounds in the third quarter and 800 million pounds in October, the bank said Nov. 15.
The kind of transparency Barclays showed increases the amount of trust in the markets. The sooner this is done, the better, and this was a step in right direction, said Berger. The shares advanced 7.3 percent.
G-20 Draft Highlights Inflation, Growth Risks
The Group of 20 nations will say oil and food prices threaten to spur global inflation even as higher credit costs damp the outlook for economic growth, according to an official from a G-20 country.
Rising energy and food prices will remain an important source of price pressures, a draft of the G-20 communiqué says, according to the official, who asked not to be identified. The G- 20 will release its statement around 1:30 p.m. in Kleinmond, near Cape Town, today. While the official said currencies were not mentioned in the draft, Canada's central bank governor David Dodge told reporters yesterday there was a frank sharing of views on the matter.
Central bankers around the world are trying to curb inflation just as fallout from the biggest U.S. housing slump in 16 years spreads through financial markets and a weaker dollar threatens to hurt growth. While the U.S. Federal Reserve has cut interest rates twice since September to shore up U.S. expansion, policy makers in India, China and the 13 euro nations say they are worried about accelerating inflation.
The price of oil has surged 58 percent in the past year and wheat prices have increased 60 percent in the same period. European inflation accelerated to the fastest pace in two years last month and Chinese inflation matched the quickest pace in a decade.
Monetary authorities in the G-20 will need to assess the effects on the inflation outlook, the official quoted the draft statement as saying.
U.S. Treasury Secretary Henry Paulson, European Central Bank President Jean-Claude Trichet and Chinese central bank Governor Zhou Xiaochuan are among the G-20 finance ministers and central bankers meeting this weekend in South Africa.
The credit collapse that began in August is likely to force banks, brokerages and hedge funds to cut lending by $2 trillion, risking a substantial recession in the U.S., Goldman Sachs Group Inc. economist Jan Hatzius wrote in a report dated Nov. 15.
Dodge told reporters yesterday that the impact of market turbulence is likely to be more prolonged than forecast at last month's meeting of the G-7 nations.
Downside risks to the near-term outlook have increased as a consequence of recent financial-market disturbances, the G-20 draft says, according to the official. While the likely slowdown in global economic outlook is expected to be modest, its extent and duration remain to be seen, the statement says.
Slower Growth
Slower U.S. growth has dulled the allure of dollar investments, prompting some investors to shift capital into other currencies. With China still controlling the yuan's exchange rate more than two years after abandoning a peg to the dollar, money has flooded into Europe and Canada.
The U.S. currency has dropped about 11 percent so far this year, based on the Federal Reserve's U.S. Trade-Weighted Major Currency Index. It fell this month to its weakest against the euro since the European currency's debut in 1999, the lowest against Canada's dollar since it was floated in 1950 and to a 26- year low versus the pound.
There was a genuine concern on the part of a lot of countries on the turbulence in the currency markets, Dodge told reporters yesterday. Bank of England Governor Mervyn King said Nov. 14 he's concerned that China's foreign exchange policies are stoking great currency tensions.
OPEC countries meeting this weekend in Riyadh, Saudi Arabia, have been debating the dollar's decline, which is making it harder for them to manage inflation and keep their pegs to the currency at the same time. Gulf states including Saudi Arabia and the United Arab Emirates may revalue their currencies in as soon as in a month's time, a person familiar with Saudi monetary policy said yesterday.
The G-20 comprises Argentina, Japan, Australia, Korea, Brazil, Mexico, Canada, Russia, China, Saudi Arabia, France, South Africa, Germany, Turkey, India, United Kingdom, Indonesia, United States, Italy, European Union.
Treasuries Rise to the Highest in Two Years on Credit Concern
Treasuries rose to the highest since 2005 as credit-market losses related to delinquent subprime mortgages drove investors to the safety of government debt.
Two-year notes gained for a fifth straight week, extending their rally to the longest in eight months on speculation the Federal Reserve will cut borrowing costs a third time this year. The Fed will release minutes of its October meeting next week, and the Commerce Department is expected to report that housing starts fell to the lowest since 1993.
The market's pricing in an easing by the Fed, said Anne Briglia, senior fixed-income strategist in New York at UBS Wealth Management Research. Price action is being driven by institutional investors who are acutely aware of the broader financial stresses here.
The two-year note's yield fell 8 basis points, or 0.08 percentage point, to 3.34 percent this week, according to bond broker Cantor Fitzgerald LP. It reached 3.28 percent yesterday, the lowest since February 2005. The price of the 3 5/8 percent security due in October 2009 rose 1/8, or $1.25 per $1,000 face amount, to 100 17/32. Yields move inversely to bond prices.
Yields on 10-year notes decreased 5 basis points to 4.17 percent after yesterday touching 4.13 percent, the lowest since September 2005. They yielded 84 basis points more than two-year notes, the widest spread since March 2005. A steepening of the yield curve suggests investors are favoring shorter-dated notes in anticipation of rate reductions by the Fed.
A slump in global credit markets will force banks, brokerages and hedge funds to cut lending by $2 trillion, triggering the risk of a substantial recession in the U.S., Jan Hatzius, chief economist in New York at Goldman Sachs Group Inc., wrote in a report dated Nov. 15.
Goldman Forecast
Losses related to record U.S. home foreclosures using a back-of-the-envelope calculation may be as high as $400 billion for financial companies, according to Hatzius.
Citigroup Inc. and Merrill Lynch & Co. have led companies writing down more than $50 billion on securities linked to subprime mortgages. The risk of further losses by banks has pushed their borrowing costs above the average for investment- grade companies.
The credit stories continue, said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world's largest inter-dealer broker. The addition of this one, of that one, add up to a sizeable amount, and we're starting to feel it. There is some doubt now about global growth.
In a sign of increased short-term credit risk, the three- month London interbank offered rate, or Libor, for dollars rose 7 basis points to 4.95 percent, the biggest weekly gain in two and a half months.
Fed Rate Outlook
Interest-rate futures on the Chicago Board of Trade showed a 84 percent chance that the Fed will lower its target rate for overnight lending between banks by an additional quarter- percentage point on Dec. 11. The Federal Open Market Committee cut the benchmark borrowing cost to 4.5 percent at its Oct. 31 meeting. Minutes will be released Nov. 20.
Fed Governor Randall Kroszner said yesterday in a speech in New York that an economic rough patch in coming months won't be enough to warrant additional rate cuts. St. Louis Fed President William Poole told Dow Jones that he's an optimist about credit market problems clearing up.
The Fed is trying to jawbone the market away from the view that they will ease again in December, said Thomas Atteberry, who oversees $2.8 billion in fixed income in Los Angeles at First Pacific Advisors LLC. We continue to see mortgage and credit problems worm their way into different places and causing concern for people.
Housing Starts
Housing starts probably fell in October to 1.17 million, the lowest since March 1993, according to the median forecast of 66 economists surveyed by Bloomberg News. The Commerce Department is scheduled to release the report Nov. 20.
U.S. debt was supported as a government report showed investors purchased the most Treasuries in September in six months. International demand for U.S. debt increased by $26.3 billion, compared with a loss of $2.8 billion in August.
Total holdings of equities, notes and bonds rose a net $26.4 billion after sales of a revised $70.6 billion in August, the Treasury Department said yesterday.
